TEN THINGS YOU NEED TO KNOW ABOUT
REGULATION BUT NEVER WANTED TO ASK
Occasional Paper 10
TEN THINGS YOU NEED TO KNOW ABOUT
REGULATION BUT NEVER WANTED TO ASK
Regulatory Institutions Network
Research School of Social Sciences
Australian National University
Canberra ACT 0200
RegNet Occasional Paper No. 8
© Regulatory Institutions Network, Research School of Social Sciences,
Australian National University 2006
Braithwaite, V. A. (Valerie A.), 1951- .
Ten things you need to know about regulation and never
wanted to ask.
1. Australian Taxation Office. 2. Tax collection -
Australia. 3. Taxpayer compliance - Australia. I.
Australian National University. Regulatory Institutions
Network. II. Title. (Series : RegNet occasional paper ;
This article has been written as part of a series of publications issued from the
Regulatory Institutions Network. The views contained in this article are
representative of the author only and not of the Australian National University
or any funding partner.
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Ten Things You Need To Know About Regulation and Never Wanted to Ask
Regulatory Institutions Network, Australian National University
For most people, “to regulate” means to control or direct others by rules, standards or
principles. The term can carry negative baggage, particularly when attached to
government. Rightly or wrongly, government regulation on occasion connotes authority
“making” people do things they would not otherwise do, and generally interfering in
people’s lives in intrusive and wasteful ways. Taxation is a field of government
regulation that has attracted such criticism, particularly amongst small business.
Regulation need not be this way. When regulation is understood as a social activity that
includes persuasion, influence, voluntary compliance and self-regulation, the term “to
regulate” takes on a whole new dimension. Regulation becomes something that we all
engage in when we intervene purposefully in our social world. It can be holding a child’s
hand at a pedestrian crossing, encouraging a work mate to take recreation leave, or
reminding a family member to put their dirty clothes in the laundry basket. At the
Regulatory Institutions Network at the Australian National University, we understand
regulation to apply to the broader social context, with an appreciation of the full gamut
of activities that fall under the regulation umbrella. As Christine Parker and John
Braithwaite (2003) put it, we regulate whenever we seek to influence the flow of events.
When we look at regulation from this perspective, people regulate each other, in the
family, at work, in leisure pursuits, and on social occasions. The regulation that
governments oversee is but the tip of the iceberg; the most formal admittedly, but in
many ways the least sophisticated. When we consider regulation across informal and
formal contexts, we gain a more complete intuitive grasp of the nature of regulation, the
role of those with power and those without, and the ways in which regulation can either
facilitate collective achievements or undermine hopes and initiative.
Regulatory Pyramids: A Broad Perspective on Regulation
When we combine the knowledge we have of informal regulation with that which we
have of formal regulation, the options for how we might go about influencing the flow of
events multiplies. Given a multitude of options, regulators must ask themselves, “what
do we use, and when?” One approach is to adopt a responsive regulatory model. Three
basic principles underlie responsive regulatory models. In order to use them, we must
first take note of the context, and consider all the informal and formal regulatory
strategies for changing the flow of events that currently operate and that might be
introduced into that context. The second principle is to make sure that the strategies can
be organized into a hierarchy from the most minimally intrusive through to those that are
maximally intrusive, with the regulatory preference being for the strategy that elicits
compliance with least intrusiveness. This way, regulators don’t over-react, creating
unnecessary problems for themselves or others. The third principle is to create
opportunities for dialogue about why regulation is necessary and elicit commitment to
voluntary compliance in the future. In implementing this principle, rewards and benefits
have a role to play. The purpose is to strengthen informal regulatory processes, and most
In practice, responsive regulation takes shape through the construction of a regulatory
pyramid. Ian Ayres and John Braithwaite (1992) developed the idea of regulatory
pyramids almost two decades ago, on the basis of observations and interviews with
regulators in many different fields (Braithwaite, 1985; Grabosky and Braithwaite, 1986).
Regulatory pyramids have been adapted to a variety of contexts, from dealing with
school bullying to corporate crime. The Australian Taxation Office (Commonwealth of
Australia 1998) has been an innovator in this regard, developing a Compliance Model
that has been exported to and adapted by other tax jurisdictions (The UK, New Zealand,
Timor Leste, Indonesia, and within the US, Pennsylvania). A generic form of the
Compliance Model from the ATO website appears below in Figure 1.
The Compliance Model
is used within particular
contexts to set out a
series of options that a
tax authority might use
to win compliance. At the base, the options may include education campaigns,
information brochures, helpful advice, and disclosure of the consequences of non-
compliance. At the next level up, monitoring and checks may be escalated, followed by
more intrusive auditing and investigations. At each level, penalties and the costs of
failing to cooperate in the face of non-compliance increase. At the top of the pyramid
may be the removal of a license to practice or imprisonment.
Most activity of the regulatory authority should occur at the base of the pyramid. The
idea is that an authority that is legitimate and that is engaging seriously with the
democratic will of the people does not need the coercion at the top of the pyramid to win
compliance in most cases. Taxpayers are aware that coercive power exists and can be
used, but generally will comply with persuasion and education. Even if there is
escalation up the pyramid to elicit compliance, once cooperation is forthcoming, the Tax
Office can de-escalate its intrusiveness.
Translating regulatory pyramids into practice can require regulatory agencies to change
their ways of thinking and operating substantially. The trick to implementing a
responsive regulatory model well is partly technical and partly psychological. The
technical side involves having sound law and a good database so that regulators know
what is going on, can identify illegalities and are able to track regulatory events for
particular entities over time. The psychological aspect, readily apparent in the behaviour
of any good regulator, is the willingness to embrace what they have in common with
mothers and parish priests: the capacity to cajole, persuade, and sometimes coerce others
into doing the right thing. Identifying what it means for a tax officer to influence
taxpayers to ensure they are willing to pay their tax was part of the research agenda of
the Centre for Tax System Integrity (CTSI), a 6-year research partnership between the
Australian Taxation Office and the Australian National University. Drawing on the work
of the staff of CTSI, there are 10 things that are part and parcel of a responsive
regulator’s “should do list.” Each is discussed briefly below. While the research focus of
CTSI has been on taxation, these ideas can be extended to other areas of regulation as
well. Indeed, much of our work has benefited from the insight of scholars of regulation
in other fields.
Should Do List: Item 1
Understand that people view a regulatory authority as a potential threat to freedom and
well-being. This threat exists for both those who break the law and those who don’t.
The power of the Tax Office to “deal” with ordinary taxpayers who don’t cooperate is
rarely in dispute. In our national surveys over five years, the tax authority was uniformly
regarded as a powerful agency: Only about 9% reported that the tax authority could not
do much if an ordinary taxpayer decided to defy it.
There are a number of ways in which we cope with the power of an authority that can
intrude on our lives. The most common approach is to adopt the role of “honest and law-
abiding taxpayer” and stay out of the firing line. Because we are “good,” we convince
ourselves we have nothing to fear: The psychology of this response is that we turn
something that is potentially threatening into something that is benign. In our work, we
find 90-93% of taxpayers identifying as moral, tax-paying citizens.
We can’t always comfort ourselves in this way, however. The tax authority can be an
adversary in so far as it genuinely threatens our wellbeing, such as when it is claiming so
much of our income that we can’t do the things we want to do. Tax can become
oppressive to us, and 73% of respondents reported that they identified the tax system as
oppressive to some extent.
Being a victim, however, is not our only option. We can fight back if we can become
adept enough or rich enough to engage in clever tax minimization schemes. Complex tax
law has contradictions, loopholes and importantly, lacks a moral base in principles of tax
equity and fairness (Picciotto, 2005). As a result, game-playing with tax law can be an
attractive option. This fight back mentality proved attractive to 13-16% of survey
These different ways of coping with taxation are available to all of us. Depending on the
circles we move in and what is happening to us, some will appeal more than others. The
effective regulator recognizes all these selves in each of us and skilfully tries to draw to
the fore that which is most likely to be cooperative: the honest and law-abiding taxpayer.
This is not to assume that our actions are honest and law-abiding. We may well be
cheating the system. The important point is that when we play the role of an honest and
law-abiding taxpayer, we are most open to wanting to cooperate, to do the right thing,
and to sort out any problems we are having with the tax authority with the minimum of
fuss. An effective regulator will reward this self, and will discourage our seeing our
situation as that of victim or as one in which we have been so wronged that we are
justified in game-playing. The outcome that the effective regulator hopes to achieve is to
move us from being adversarial to cooperative, to move us from the top of the regulatory
pyramid in Figure 1 to its base.
Should Do List: Item 2
Know the regulatory objective: Is it to punish or is it to elicit compliance in the future?
Both can be legitimate, depending on the objective of the regulatory agency at the time.
What is important to note, however, is that punishment and improving compliance do not
necessarily go together.
Tax authorities will apply heavy penalties and prosecute cases when their goal is to make
a public statement about the unacceptability of certain activity. Punishment becomes the
regulators’ vehicle for capturing the community’s attention and influencing community
standards. Punishment can be an act that signals renewed vigour in keeping the bar high
and insisting that taxpayers jump it.
The effectiveness of punishment for signalling community standards is rarely disputed.
What is disputed is the effectiveness of punishment in getting individuals to change their
ways. The reasoning put forward by regulators for why punishment should increase
compliance is irrefutable in the minds of some: If individuals feel no punishment as a
result of cheating on tax, they will cheat again. If they are punished, however, they will
factor in the costs of cheating and will shy away from taking that risk and opt instead for
What the evidence tells us is that more is happening in the minds of individuals than this
neat calculation suggests. Many of us are not so rational and not so dispassionate in
assessing possible gains and losses. Furthermore, in real life, it is not a given that
individuals graciously concede to government authorities. The term “reactance” is used
by psychologists to describe a response that is the opposite to that which authority wants
– it’s a response of thumbing one’s nose at authority and asserting one’s freedom. The
more general psychological point here is that the self that we put forward to the tax
authority is ours to give and will not be imposed on us by an authority. The self that we
put forward filters how we see the tax authority, what we take in and how we use the
information we have. If an authority gets our back up, our cost-benefit analysis is likely
to look very different to us than regulators believe it should look.
There is considerable merit in considering the goal of eliciting future compliance as a
separate enterprise from punishment. Eliciting future compliance involves
simultaneously addressing a number of issues: debating and persuading of the rightness
of the compliant action, showing how compliance can be achieved and uncovering
incentives for compliance. Incentives take the form of bedding down the desire to do the
right thing. At the same time, we should not overlook the fact that knowledge of possible
punishment further up the pyramid may serve to make us more receptive to appeals for
commitment and acceptance of the regulations at the lower levels.
Should Do List: Item 3
Be open to cases of hardship: Is this individual’s life being limited or compromised in an
unexpected way by regulation. Can anything be done to help ease the pressure?
Much is made of taxpayers acting in their self-interest, with a focus generally on how
regulators can increase the costs of non-compliance so that the pursuit of self-interest is
abandoned. While this model can be appropriate in some instances, it is not in others. In
the life of operational tax staff, ritualistically taking such a course of action can mean
pushing a struggling business to bankruptcy when connections with a good accountant,
the development of a sensible business plan, and a payment plan for back taxes could
restore the business and provide the owner with a future. When regulators use their
inspections and audits to try to get to the bottom of non-compliance, they are uniquely
positioned to add value to the life of the business and not just recoup lost taxes. They are
also uniquely positioned to witness first-hand shortcomings in their own regulatory
demands and perhaps even unfairness in tax law. The versions of the Compliance Model
adopted by the Australian Taxation Office and (even more so) New Zealand Internal
Revenue show how forming partnerships with the business community can benefit both
regulators and regulatees. At the heart of these partnerships is the very important insight
that comes with understanding how tax law in the abstract plays out in practice to affect
the livelihood of individuals.
Should Do List: Item 4
Deliver procedural justice to regulatees by treating individuals with respect, ensuring
procedures are clear and transparent, and provide a reasonable and fair hearing.
Research findings from CTSI and elsewhere suggest that if there is one thing that
regulators can do to improve their capacity to regulate it is to abide by principles of
procedural justice. Procedural justice reflects formal processes that are impartial,
transparent and accountable, but the aspect of procedural justice that appears to
transcend all these things is respect for the person being regulated. Treating taxpayers
with respect and having taxpayers report that they have been treated respectfully by the
tax authority is a critical element in setting up a cooperative relationship between
taxpayers and the tax authority. Cooperative relationships allow constructive regulatory
conversations about taxation, its purpose and its principled base to take place.
Should Do List: Item 5
Engage constructively with dissenting voices.
In surveys conducted in 2000 and 2005, Australians were asked about the state of their
democracy. Some 85% reported feeling at least some level of cynicism or
disillusionment, with many claiming democracy in Australia had lost its original
meaning and had become a “dollar democracy.”
These findings raise an important point about the role of dissenting voices, in
government generally and government-led regulation specifically. There is no perfect
blueprint for regulation with which everyone will agree and thus no reason for supposing
that a regulatory blueprint can be effectively imposed on a community from the outside.
Australians do not view authority as all-knowing, all-wise, or all-benevolent. They do,
however, recognize the legitimate authority of regulators, the Tax Office for example.
Many regulators reading this will say, ”That’s all we want. If they recognize authority,
they’ll respect us and do what we want.” That may be true, but there is a down side to
the authoritarian imposition of rules. Those being regulated may simply develop
strategies for working around them. Many will do only the basics that can be monitored
and act without thinking about whether their actions meet the broader goals of the
regulatory system. We call this regulatory ritualism, where people or businesses choose
actions which look good to avoid regulatory interference instead of actions which really
make a difference and maximise positive outcomes.
To be effective, regulators often need the cooperation of people in the regulatory
community. Cooperation involves motivating people to step up to be part of the
regulatory enterprise and to contribute good will, effort and knowledge to make it a
success. In order to achieve this result, a regulator must listen to and learn from different
voices, even dissident voices. Voices of dissent give rise to dialogue, creating problem
solving and innovative regulatory approaches, such as the Cash Economy Taskforce’s
Compliance Model (Commonwealth of Australia 1998).
Should Do List: Item 6
Engage with dissent in terms of social justice: Do the outcomes of the regulation benefit
everyone? Are the costs and benefits of regulation born disproportionately?
The work of the Centre for Tax System Integrity explored justice at different levels:
justice for individuals, justice for groups and justice for society as a whole. Questions of
justice can refer to whether outcomes are fair, or whether the processes are fair, or
whether the penalties and punishments are fair. Because there are so many kinds of
justice, often working in different directions and affecting people differently, it is
difficult to put one kind of justice on a pedestal above another and to see how these
different kinds of justice work to promote or undermine compliance. What we can say
with certainty is that Australians most commonly and most passionately point to the lack
of fairness in the system. In particular, Australians believe that middle-income earners
carry the tax burden while the rich are allowed to get away with paying little tax. In fact,
a staggering 77% of Australians believe the very wealthy don’t pay their share.
One of the most interesting aspects of the CTSI work was to discover how unfairness
could insidiously eat away at the system. There was nothing as straightforward as “you
have treated me unfairly, therefore I will treat you unfairly.” Australians showed
enormous resilience, in so far as they complained overwhelmingly about a system that
they believed gave the rich preferential tax treatment but kept proclaiming allegiance to
doing the right thing and paying their taxes. The evidence that the experience of
unfairness took its toll came to our attention in a surprising context. In our work on
graduates who had taken out a HECS loan to pay for their tertiary education, we found
evidence that students who were dissatisfied with their education felt less of an
obligation to repay their debt. This weakening of the obligation to pay HECS was linked
to a weakening of obligation to pay tax. Our work has shown that weakened obligation to
and dismissiveness of the tax authority are risk factors for future tax evasion and
Should Do List: Item 7
Engage with dissent on moral grounds: Is it right to change the flow of events in this
Morality is not always divorced from government-led regulatory interventions. In the
HIH debacle, in industrial accidents that claim human life, in environmental disasters
that destroy wildlife and our natural heritage, issues of moral conduct (or the lack of it)
loom large. Morality, however, is not a term that is linked with tax evasion and
avoidance in the financial pages of our major newspapers. This absence among financial
leaders and commentators is not reflected in the views of Australians. Evidence comes
from three sources.
First, in our 2001 national survey we concluded with two open-ended questions: “What
is your responsibility to the Tax Office?” and “What is their responsibility to you?” The
responses were overwhelmingly concerned with honesty and fairness on both sides. We
saw in these responses that the endless newspaper reports on questionable schemes to
minimise tax and use tax law for wealth creation were not reflections of the Australian
psyche. Australians took their taxpaying responsibilities seriously and they expected the
Tax Office to take its collection responsibilities, including enforcement, just as seriously.
Second, in our survey work a high 92-95% believed that they and others should
contribute willingly to the tax system and that the tax system is an institution which
advantages everyone and helps the government do worthwhile things. Over 70%
believed it was morally wrong to cheat on tax. However, many respondents also
expressed a belief that others did not share their views, with some 85% saying they
thought others doubt the benefits of paying tax. The fact that personal norms for honesty
were far stronger than perceptions of the norms of others reflects a need to sure up the
confidence of community members in each other rather than personal failings in moral
obligation to pay tax.
The third source of support for the argument that tax officials need to engage with
compliance on moral grounds comes from the international literature on tax compliance.
The most consistent predictor of compliance has been tax morality – simply, the belief
that it is morally wrong to cheat on one’s tax. Recently, Sol Picciotto (2005) published a
working paper with CTSI that makes the point that none of us really has a good grasp of
the principles of equity and fairness that underlie the development of tax law. Picciotto
argues that as hard as it may be, this is a conversation we have to have if tax systems are
to be sustainable in the globalised economy.
Should Do List: Item 8
Provide hope for the future through recognizing and praising strengths openly.
The importance of incentives is only beginning to be understood in regulatory contexts.
There seems little doubt that recognition of effort and praise for improvements in
compliance related activities go a considerable way to building commitment to the
regulatory regime and future cooperation with regulators. It is part of the process of
showing respect for others and valuing their contributions. Using incentives successfully
for sustainable compliance requires a delicate touch. Bruno Frey (1997) uses “crowding
out theory” to describe the way we can tell ourselves that “we are just doing this for the
reward” and divorce our action entirely from commitment to the system. Just like the
ritualism described earlier, if there is no internalised desire for improved compliance and
we do things for rewards without care for how our actions connect with the bigger
regulatory objectives, incentives can prove a costly measure for changing the flow of
Rewards, therefore, need to be introduced in such a way as to generate awareness of how
compliant actions serve the bigger picture, how actions solve the problems that led to the
regulation being introduced in the first pace. Rewards need to strengthen a person’s
internal resolve to achieve the goals of the regulatory system. For example, taxpayers
should feel proud of having tax ethics that are stronger than those of people around them.
It would be of limited value to offer rewards for compliance unless they built internal
commitment and pride in paying one’s tax over time.
Should Do List: Item 9
Return to the scene of non-compliance and re-engage with regulatory intervention
Non-compliance in taxation can come about through ignorance, a lack of know-how, a
lack of self-discipline, or wilful disobedience. Whatever the reason, repeated incidents of
non-compliance can be expected. When regulators become locked into a punishment
mindset, their solution to repeat offending tends to be one of increasing punishments.
This course of action may well be the most appropriate, but regulators can create an
unnecessarily heavy and confrontational workload for themselves by failing to look more
broadly for a solution.
Building a repertoire of strategies is at the heart of using regulatory pyramids like the
Compliance Model. Such strategies need to range from light-touch to heavy-handed
interventions, and the repertoire is best developed at the operational level through
bringing together experienced inspectors who can share their stories of how they turned a
persistently non-compliant taxpayer into a compliant one. Regulators should feel able to
draw on the knowledge and experience of others and take professional pride in persisting
with cases that are challenging. Rigidity of investigative protocols and a reluctance to be
responsive to circumstances and past compliance history hampers regulators who wish to
Effective regulators, whatever the field, are talented people: They know their trade, are
observant, courageous, can think on their feet, take initiative, have emotional
intelligence, and well developed social skills. We are often asked “what if we don’t have
such people? Isn’t it best to stick with set scripts and predetermined protocols - isn’t this
the best way to make sure nothing goes too wrong?” The more important question to ask
is what is going right in these circumstances. Regulators can do more harm than good by
destroying good will, dampening hopes and ruining initiative. The answer for regulatory
agencies is to find people with potential and train them to carry out their duties
responsibly and competently. As regulation enters a period of massive growth, a question
worth asking is whether poor regulatory practices feed upon themselves, creating more
and more problems that require more and more poorly trained regulators to solve.
Should Do List: Item 10
Direct energy to building networks within the regulatory community to gain a broad-
based capacity for eliciting compliance.
In many areas, basic issues associated with regulation are unclear, forever changing and
may even appear contradictory. It is not unusual for questions to be raised from all
quarters in the regulatory community: What is the purpose of the regulation? Do the
regulatory requirements address the problem or just move the problem somewhere else?
How do we know if the requirements have been met? Regulation is complex, so complex
that government regulators are only part of the web that ensures that regulatory regimes
work. In the context of taxation, for instance, the Tax Office could not function without
the support of tax agents, accountants and lawyers in private practice, nor could they
function without the courts, judges and expert legal opinion on the interpretation of tax
Increasingly, regulators are working collaboratively with other regulatory agencies,
professional associations, business groups, consumer groups, political representatives,
and academic communities. Sharing knowledge and practices, coordinating operations,
and building networks are all part of modern-day regulatory practice. As the power of
networks has come to be recognized, strategic decision-making and resource-allocation
to prioritise the extension and development of some networks over others has also been
In this process, which is well underway in many regulatory contexts, there has been a
tendency to put to one side a fundamental point of contact. Too often, regulatory
authorities lose touch with the voice of the people. In many ways, this voice is taken for
granted as being expressed through elected representatives and as a support base for the
regulatory pyramid, one that regulators can count on regardless. The costs of thinking in
this way are high. Without contact with the people and without their input on regulatory
initiatives, authorities cheat themselves of an understanding of the moral underpinnings
of their regulatory power, the very understanding on which their legitimacy is based.
Ayres, Ian and John Braithwaite (1992) Responsive Regulation: Transcending the
Deregulation Debate. New York: Oxford University Press.
Braithwaite, John (1985) To Punish or Persuade: Enforcement of Coal Mine Safety.
Albany: State University of New York Press.
Grabosky, Peter and John Braithwaite (1986) Of Manners Gentle: Enforcement
Strategies of Australian Business Regulatory Agencies. Melbourne: Oxford
Commonwealth of Australia (1998) Improving Tax Compliance in the Cash Economy,
Frey, Bruno S. (1997). "A Constitution for Knaves Crowds Out Civic Virtues."
Economic Journal 107: 1043-1053.
Parker, Christine and John Braithwaite (2003) "Regulation." In Peter Cane and Mark
Tushnet (eds), The Oxford Handbook of Legal Studies. Oxford: Oxford
Picciotto, Sol (2005) "Constructing Compliance: Game-Playing, Tax Law and
Compliance." Centre for Tax System Integrity Working Paper No. 81, Canberra,
Australian National University.
The Centre for Tax System Integrity was funded from 1995 to 2005 as a research
partnership between the Australian National University and the Australian Taxation
Office. The purpose of the Centre was to understand how voluntary taxpaying
cultures can be sustained and what is happening to boost or erode taxpayer
compliance. This paper brings together the author’s view of the major findings of the
Centre and is not a reflection of the view of the Commissioner of Taxation. All
survey findings and publications from the Centre are available to the public through
the CTSI website http://ctsi.anu.edu.au